The government is preparing to scrap value-added tax (VAT) on electricity tariffs after the Energy, Water Resources and Irrigation Ministry and the Ministry of Finance reached an agreement in principle.

Energy Minister Biraj Bhakta Shrestha and Finance Minister Dr Swarnim Wagle reached the understanding on Sunday evening, according to a source at the Ministry of Energy. The source said the Prime Minister has also expressed a positive view on removing the tax.

The proposal will now require a formal Cabinet decision. If approved, VAT on electricity tariffs will be removed after being in effect for only around two months.

The government introduced VAT on electricity through the budget for fiscal year 2026/27. Under the provision, household consumers using more than 50 units of electricity per month were subject to 5% VAT, while industrial and other non-household consumers were charged 13%.

The Nepal Electricity Authority had initially deducted the VAT even from some June bills, although the tax was officially applicable from July. Following clarification from the Inland Revenue Department, the authority updated its billing system to apply the tax from July.

The VAT provision had drawn opposition from businesses and industrialists, who argued that the 13% levy on electricity would increase production costs and could raise the prices of goods and services.

According to the Energy Ministry source, if the government formally removes the VAT, the tax already collected on electricity bills since July will also be reconciled. The amount collected earlier is expected to be adjusted through subsequent electricity bills.

The existing VAT arrangement will remain in place until the Cabinet formally approves its removal.